Rent Seeking

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<p>flent-$eehin0 Families andthe Philippine Stnle: fl ]|istorq of</p> <p>lhe Lopez Fomilq</p> <p>AlfedW</p> <p>McCoy</p> <p>Eugenio Lopez,Sr., stood at the summit of Philippine public life. Starting as a provincial bus operator, he had risen in only sixteen years to become chairman of the country's largest media conglomerate and president of its leading utiliry, the Manila Electric Company.I His brother was finishing a third term as vice-president of the Philippines. His closest friends dominated the sugar industry, the country's leading export. His</p> <p>I In ;,.rn. 1972,</p> <p>fortieth wedding anniversary had been a brilliant spectacle "where champagneflowed as freely as a fountain" and "he had royalry and crdme de la crdme of Asia, Europe and America flown in."2 Using his formidable media assets, he had recently defeated the country's president, Ferdinand Marcos, in a bitter battle over the spoils of power. Appearing at the Harvard Business School that June to receive its Distinguished Service Award, Lopez heard one speaker hail him as a man whose "story brings a unique message of inspiration."3 Only three months later, President Marcos declared martial law and destroyed Eugenio Lopez. After imprisoning his eldest son on capital charges, Marcos forced Lopez to sign over his shares in the Manila Electric Company and to watch silently while a presidential crony plundered his media conglomerate. Forced into exile, stripped of his wealth, and tortured by the threat of his son's execution, Lopez died of cancer in 1975 in a San Francisco hospital-a death ignored by Filipinos who had once sipped his champagne and celebrated hisachievements.4</p> <p>More vividly than any other, the story of Eugenio Lopez illustrates the close connection between state power and private wealth in the Philippines. For over thirty years, Lopez had used presidential patronage to secure subsidized governmenr</p> <p>43O ALrnro W. McCoYfinancing and dominate state-regulated industries, thereby amassing the largest private fort.rrr. in the Philippines. After declaring martial law in 1972, Marcos used ,h" ,"-. state power to demolish the Lopez conglomerates and transfer their assets to a new economic elite composed of his kin and courtiers. Despite their deep personal enmity, Lopez and Marcos were in some resPects more similar than either might have imagined. Putting aside their rhetoric, both acted in the apparent belief thai the state should reward a self-selecting, economic elite instead of using its resources to sffengthen the public sector or uplift the country's poor. Both used their political influence to benefit private corporations controlled by their families. During the period of the Philippine Republic (1946-72), the two became master of the state, oPerators without peer within their respective realms'Although Marcos was a career politician and Lopez an entrepreneur, their common commingling of btrsiness and politics drew them into the political arena where they met face-to-face, first as allies and later as enemies. The Philippine state's pairing of substantial resources with a politicized Marcos' system for their allocation has encouraged careers like those of Lopez and state has accumulated Unde, the doctrine of national dwelopment, the Philippine substantial financial resources and broad regulatory authority' But, instead ofusing these economic powers to promote development, as in South Korea or Singapore, the Philippin. e*.cuti',re branch has expended these resources as "rents" to reward retainers. Although no single factor c:ln account for such a cluster of problems' the role of rents explains a good deal about the weakness of the Philippine state and the coresponding sffen$h of Filipino political families' The theory of "rents" can help us explain some significant asPects of this complex relationship between Filipino elites and the Philippine state. As defined by the state uses regulation to restrict "freedom of James Buchanan, rents appear when these restrictions create a monopoly, the economic entry" into the market. If consequences are decidedly negative-slowing growth and enriching a few favored "rent enffep;eneurs. Competition for such monopolies, a political Process called Buchanan offers a ...king," can produce intense conflict. To illustrate this point, p"r"bL that seems surprisingly germane to both electoral politics under the</p> <p>-*iplhto.i</p> <p>^lhilippi.r.</p> <p>Republic and to "crony capitalism" under President Marcos.5</p> <p>Suppose that a courtier persuades the queen to grant him a royal monopoly to ,.ll pl"yi"g cards throughout the kingdom. The courtier so favored will captue sizable monopoly profits or economic rents, and this will be observed</p> <p>by other persons who might like to enter the industry. But their entry is effectively prwented by enforcement of the royal monopoly privilege. \rhat the queen gives, howwer, the queen may take away' and the potential entrants are not likely to sit quietly by and allow the favored one . . . to enjoy his differentially advantageous position. Instead of passive observation, potential entrants will engage actively in "rent seeking"' They will invest effort, time, and other productive resources . . . to shift the queen's favor</p> <p>Western Visayas Region</p> <p>I IO l0</p> <p>llrovince lkruntlary l,and ovcr .5(X) rnctcrs Land over 1000 metersLand over 2000 meters20 30 4050 kril</p> <p>Aiu;".':' ., "' l.t</p> <p>(r'</p> <p>i</p> <p>NI</p> <p>' rJ S",</p> <p>rt'' ,s$.</p> <p>"</p> <p>''..</p> <p>,'iuo*os 8ilffirar'</p> <p>432 ALrBro W McCoytoward their own cause. Promotion, advertisement, flattery, persuasion, cajolery-these and other artributes will characterize rent-seeking behavior.</p> <p>In many Third \forld counrries, as Anne Krueger has argued, renrs a:: "pervasive facts of life." In India such restricted economic activiry accounted for -._:percent of national income in 1964, while in Turkey rents from imporr licenser alone represented about 15 percent of the gross national product (GNp) in 195: Given the importance of rents in both countries, the srruggie for these resrricr:-... licenses through rent-seeking acriviry is "highly competitive."6 Arguing, at leasr by implication, thar these parasitic rents expand as the sr::. increases its intervention in the economy, First world proponents of the concept ha-,.. become acolytes for a neo-conservarive idealization of the free market. "scholars :: dwelopment often vent their frustrations by identifying the culprits that keep t1:..: theories from working," nores Peter Evans in his critique of the literature on rer::"Recently . . . the state bureaucrat, strangling the golden goose of entrepreneurs:._: and lining his pockets with unproducrive renrs, has again become the central villair. Rejeccing the idea that states are "standardized commodities," Evans posits a *'::. spectrum of public-sector performance ranging from a "predarory" state such as Za-:. to "developmental states" such as Japan. Both have wieided a healy interventrol.s: hand in their economies but there have been some obvious and dramatic differe:::; in the outcomes-misery in Zaire and prosperiry in Japan. Seeking rhe reasons :_.</p> <p>these differences, Evans argues that a developmental state depends upo:r. meritocratic bureaucracy wirh both autonomy of action and a strong corpo:a:. identiry. Above all, Evans argues rhat we musr examine specific cases before -.,,:generalizr about the reladonship bewveen the state and rents.s</p> <p>Recent Philippine writing can serve as a useful correcrive to rhese appa:::.: biases. Surveying the economic wreckage of the Marcos era, Filipino poli:.:.</p> <p>economists have applied rhis theory to explain how the Palace's rent-seek::courtiers used state power ro plunder the country. Although sharply critical :: particularly venal regime, these economisrs still manage to avoid wholes=. condemnation of che state, rhereby jettisoning the antiregularory, anrisrare br:.. that inform much of the original theory. Despite this creative adaptation o: :--,, concept, most of the Filipino work lacks detailed empirical evidence and :::_ suffers from an apparent superficialiry. For example, in his seminal study of the --:, of businessmen in state economic planning, Manuel Montes, an economisr a: -*--, Universiry of the Philippines, argues that "the economic srrucrure of the cor:.:: . . stimulates, encourages, and provides the greatest rewards to 'renr-seei::.:activities. "9</p> <p>In a "profit-seeking" economic structure, assets and income are lvon anc -:.: on the basis of the ability of the business owner to develop the propern'. In a "rent-seeking" society, ownership ofproperty alone guarantees rhe a::=,,.</p> <p>towealth....</p> <p>RrNr-SrrrrNG FAMtIES AND</p> <p>THE</p> <p>sTATe 433</p> <p>In the case of the Philippines, we can generalize 'ughout his ections and succeed in onal phases</p> <p>::sed, with-rs enemies.</p> <p>idency andenterprises</p> <p>ired, often</p> <p>ld</p> <p>ro perceive cunning</p> <p>:ns studied ' In its fivehe rvrote a</p> <p>argued, by violating the spirit and letter of the colony's fundamental law. By assuming legislative and executive powers without sufficient legal foundation, the council violated the Jones Law, the colony's de facto constitution, and defied the basic legal doctrine of separation of powers. Moreover, the council arrogated unto itself extraordinary, almost dictatorial, powers, interpolating itself into every aspect of government and acquiring considerable power over the economy. Eugenio Lopez's study of the legislation and judgments relating to the council's legality is an insightful, impassioned critique. After reviewing the organic basis of the Philippine government, "thewriter can not find a part in theJones Law which would mean a reference to the Council of State. Not even a phrase or word by which an anaiytical mind may be led to argue that the law impliedly or indirectly refers to the Council ofState."60 Since the Jones Law "created the three departments of government . . . granting to each well-defined powers and rights," the council is "entirely foreign to the machinery of government" and is "completely subversive to well-known principles of government."6l In acceding to Osmeia's request, Harrison had, in Lopez's judgment, defied the law. 62The writer admits the right of the Governor-General to ask the advice and consent of those persons he wants to consult. . . . No law forbids him from doing that. But when the Governor-General creates an advisory body there is put forth a new question. . . . The Governor-General has the right to be advised but he has no right whatsoever to form a body of advisors like the Council of State.</p> <p>'ared as thes basic laws</p> <p>.opez began</p> <p>omena: th</p> <p>r. country's</p> <p>:rr into the:lication in,::re elusive</p> <p>-^.;,.,.L-</p> <p>Despite its patent illegality, Lopez continues, rhe council "has not limited itself in advising the executive . . . it has exercised legislative powers, encroached on executive functions . . has controlled the policy of the government, nay it has</p> <p>450</p> <p>ALFRED</p> <p>W. McCoY</p> <p>assumed almost dictatorial powers."63 Lope, also found that by 1920 the council had assumed a remarkable range of powers-distribution of P30 million to promore universal elementary education, dispersal of P300,000 for rinderpest serum, reviews of government salaries, approval of bonds floated by local governments, control over irrigation projects, and even the drafting of the 1920 budget.6a "It stands to reason," he argues, "that the Council of State is performing [sir] not only questions of importance, but also the most trifle [ric] things in government. The powers of the Council of State have become unlimited. The accumulation of these powers in the Council of State is a danger and menace to our free institutions."65</p> <p>Citing Montesquieu on the significance of this precept, Lopez further charges that the council "has violated the principle of separation of powers which is considered the basis of every democratic government."66 He argues that the governor general's arbitrary control over the council's membership had profoundimplications for the country's republican form of government.6T</p> <p>If in the past the Governor</p> <p>confidence ofthe people, he has done it, not</p> <p>General have [sic] appointed persons having the because he was debarred by law</p> <p>or by the order creating the Council of doing otherwise, but simply as a matter of favor or what we may call an executive concession. If the Council of State knowing as we do its tremendous influence as well as its powers and privileges, were composed of persons not bearing the popular confidence, how then can we assent that it is a representative body? . . . Ifit ceases to be a representative body, it is repugnant to the republican form of government which has been established in the Philippine Islands. . . . Its existence is subversive to the foundations of free government.</p> <p>In Lopez's argument, the key test of the council's legality came during the rice crisis of 1919 when the governor general issued a proclamation fixing the retail price of rice. A week later, the government charged a Chinese merchant named An Tang Ho with selling rice at an excessive price and he appealed his conviction. In aunanimous decision, the Philippine Supreme Court found that the governor's proclamation represented an improper delegation of legislative powers to the executive and was therefore unconstitutional. After pointing out that the governor general was acting at the direction of the council, Lopez concluded that "it was not the Governor-General who exercised the delegated powers, it was the Council of State to which he belonged." By failing to confront the Council of State on this issue, the Supreme Court, in Lopez's words, "showed cowardice" and "abdicated the right of fearless judgment."68 'W'ood succeeded Harrison as The council was disbanded only when Leonard governor general. In October 1923,'Wood criticized the council as a "violation of principles of constitutional government," and Senate president Manuel Quezon</p> <p>ReNr-StrrtNG FAMTLIEs AND THE sTATEcouncil</p> <p>451</p> <p>introduced legislation to stripcollapsed soon after.</p> <p>it of its</p> <p>illion torpest</p> <p>Powr to authorize local bond issues.69</p> <p>It</p> <p>The implications of Lopez's critique of the council of state are profound.lv{ost importantly, he seems to discern that this powerful organ was able to defy the most fundamental laws and legal principles of the country as long as the executive willed it so. Moreover, it could continue to do so for an indefinite period of time. had trampled the country's constitutional PrecePts for the Osmefia and</p> <p>by localrhe 1920</p> <p>irgthings in ited. Theto ourcharges</p> <p>Quezon</p> <p>which is s that theL</p> <p>profound</p> <p>of political expediency, and then attacked their creation as unconstitutional when it no longer suited their interests. Simply Put, there were no aPParent restraints to the arbitrary exercise of executive power in the Philippines. Observing his country's first experience of executive auth...</p>